The Short Thesis

Inogen Supplies Medical Portable Oxygen Concentrators

(POC)
• Typical POC patient: 75+ years, end-of-life respiratory disease, average 2.5 years on therapy

Stationary oxygen device at home

• Used by 100% of patients

Traditional portable tanks Inogen’s portable oxygen concentrator

Oxygen outside the home

• Only appropriate for 70% of patients
 How Management Presents the Oxygen Market
Market Size: 4m patients
2-3 years on therapy = 1.6m dying annually
• Vs 2.8m Americans dying each year = 60%
on oxygen therapy?
• Growing 7-10% = full penetration by 2025?
Source: Wintergreen Research
• 7 employees on LinkedIn
• 40 reports annually from sports bras to
wind turbine bearings
• report author confirmed traditional
reimbursed oxygen therapy market is and
will continue declining with the growth
coming from new uses for oxygen (casino
floors, movie stars) and new products yet
to be invented
Sources:
Slide is from Inogen’s Q2 earnings call presentation (they replaced the slide in November with a less explicit one). 2-3 year on therapy comes from Inogen (latest was Inogen 13-Nov-2018 at
the Stifel conference) but is confirmed by industry sources and CMS. 2.8m deaths is my estimate based on Centers for Disease Control and Prevention who said 2.7m deaths in 2016.
 CMS is the Largest Payor and Provides Detailed Records
ALLOWED ALLOWED
HCPCS
SERVICES CHARGES
• E1390 is the CMS code for stationary
E0424 1,428 $107,049 oxygen concentrator services
E0431 3,420,261 $61,205,702 • Virtually every Medicare patient uses a
E0433 N/A $84 stationary concentrator
E0434 72,408 $1,313,777 • One E1390 service represents a month of
E0439 49,187 $3,744,840 stationary oxygen concentrator provision,
E0441 108 $6,011 generally billed and delivered to the
E0442 77,592 $4,239,965 patient by a homecare provider
E0443 425,192 $21,131,207
E0444 70,708 $3,502,696
E1390 7,663,266 $578,814,631
E1391 342 $26,960
E1392 913,299 $35,257,093
Total $740,231,659

Sources:
Medicare data: https://www.cms.gov/Research-Statistics-Data-and-Systems/Downloadable-Public-Use-Files/Part-B-National-Summary-Data-File/Overview.html
 Total US POC-eligible Patient Population – the Maths
Oxygen Market Population Size # patients (k) Comment

Medicare Stationary Oygen Services 2017 A 7,663 E1390 # services reimbursed

Medicare Reimbursed Oxygen Patients B = A / 12 639 Monthly average patients

Medicare reimburses first 36 months of

Medicare Patients
C = B / 83% 769 patient therapy and 17% of patients are on
(Reimbursed and Non-Reimbursed)
37th month or beyond
Medicare has c. 60% share, with remainder
Total Oxygen Market
D = C / 60% 1,282 made up largely by Medicare Advantage and
(Medicare, Private incl. Medicare Advantage)
other private plans
Total Oxygen Patients with Ambulatory Only 73% of total patients are mobile and
E = D * 73% 936
Needs require an out of home solution

10% of patients need continous flow of

Total US POC-eligible patients F = E * 90% 842
oxygen provided only through oxygen tanks
Sources:
Medicare data: https://www.cms.gov/Research-Statistics-Data-and-Systems/Downloadable-Public-Use-Files/Part-B-National-Summary-Data-File/Overview.html
17% unreimbursed as Medicare doesn’t reimburse months 37—60 of therapy (Inogen 2017 10-k p. 60)
60% of patients covered by Medicare (Inogen 2017 10-k p. 3)
65.7% POC-eligible ambulatory patients (Inogen latest investor presentation p. 8), see slide 6
The Medicare Reimbursed Oxygen Market Has Been Declining
Patient Decline Reimbursement Decline
• Number of Medicare patients has been declining • Medicare reimbursement for POC Ambulatory
3.5% p.a. since 2010 Oxygen cut by 44% from 2012 to 2018
• Grossing up for mix shift from Medicare to
Medicare Advantage, total oxygen population
declining 2.0% p.a. since 2010
• Reasons include less smokers, reimbursement cuts
and more frequent audits
Oxygen Patients - CMS (E1390)
1,000

800

600

400

200

0
2010 2011 2012 2013 2014 2015 2016 2017

Source:
https://www.cms.gov/Research-Statistics-Data-and-Systems/Downloadable-Public-Use-Files/Part-B-National-Summary-Data-File/Overview.html
Latest Inogen presentation, page 18
Management Leads Investors to a Penetration Story
“most providers still have to switch to POCs”

BUT 1 patient 1 POC

Homecare providers use POCs at least throughout 5yr

warranty period vs retail using only over 2-3yr life expectancy

Homecare providers pay only roughly half the $2,295 retail

prices

Each $ of POC sold to homecare providers cannibalizes the retail channel

and reduces revenue pie by a factor of >4x :

Note: Interviews with homecare providers suggest providers pay prices ranging from $1,200 to below $1,000 for a POC. Inogen’s blended ASP was $1,674 YTD and the minimum retail price
is $2,295 (excluding extended warranty or spare batteries).
 From Patient Population to POC Sales by Channel
Sales to Patients (Cash or Credit) (50%) Provider-Supplied Rentals (Reimbursed) (50%)
• Patients order the POC from Inogen • Homecare providers supply to patients for monthly
• Patient has 2-3 years life expectancy CMS/private reimbursements:
• $2,295 retail price • > 5 years useful life of POC (due to warranty)
• If market was only patient sales, POC sale • Purchase price $1,000-$1,200
opportunity would be 840k / 2.5 years = 336k • If market was only provider rentals, POC sale
opportunity would be 840k / 5 years = 168k

Full Penetration Market Size (annual POC sales) = AVERAGE (336k, 168k) = ~250k POCs

Inogen Full Penetration US Sales Potential @ 60% market share = 250k * 60% = 150k POCs
vs. Inogen’s 150k US POCs 2018E sales
INOGEN IS ALREADY CLOSE TO RUN-RATE
Sources: 5-year warranty: Inogen homepage (http://info.inogen.com/b2b/) and discussions with homecare providers. Market share is my estimate; management estimated that they had
50% market share at a conference on 27-Mar-2018.
$ US Market 10x Smaller than Research Estimates
Stifel My View Trend Source
Total patients (k) 3,927 1,282 Declining patient #s Medicare
% POC eligible 70% 66% Inogen
POC-eligible patients (k) 2,749 842
years of usage 1 3.4 Longer usage due to mix shift Warranty
POC market - per year (k units) 2,749 250
ASP ($) 2,295 1,674 Historical 5-10% ASP decline p.a. Inogen & Providers
US Annual Market Opportunity ($m) 6,308 418

Sources: Stifel report dated 21-Aug-2018. My view of patient size based on slide 3 above. % POC eligible from Inogen presentation (slide 6 above). Years of usage from slide 5 above (840k /
250k = 3.4 years). ASP based on YTD POC sales of $255.3m vs 152.5k units sold (Inogen’s quarterly earnings releases). Stationary oxygen concentrators are available for $350 (as per
estimates given by homecare providers) and one could imagine that portable oxygen concentrators could approach that price in the long-run.
 Limited International Potential

• Europe represents 88% of Inogen’s International revenues

• Europe has about 500k patients and is mostly provider-driven (i.e. 5-year
usage of POC)
• Inogen is c. 50k unit run-rate and similar logic to US market applies

Inogen is around replacement-rate level

• Emerging markets/China lack government reimbursement support, are tightly

controlled and supplied by low cost copy cat manufacturers

Source: International business breakdown from last earnings conference call transcript (6-Nov-2018). European patient population: http://www.efanet.org/images/2012/07/EFACOPDBook.pdf.
 The Price is Right! What’s the right multiple for Inogen?
• Single product company serving a declining patient pool with declining ASPs running at close to full
penetration run-rate financials
• Limited technological advantage: R&D < 2% of Sales vs Sales & Marketing >50% of Direct-to-Consumer Sales

Current Market/MedTech Fair Value

P/E 2019E 73.5x 20.0x 15.0x
Stock Price $140 $46 $37
Downside % -67% -74%
Based on Management 2019 Earnings Guidance of $38m and adjusting for $224m cash on BS, i.e. grossing up Target Price by $10.4

Note: Inogen’s tax expense is below normalized levels in 2018/19 due to high levels of stock-based compensation and a higher share price. The numbers above normalize the tax rate as per
guidance given on the 6-Nov-2018 earnings conference call. Stock price as per 27/11/2017; assumed cash of $224m.
Let’s Call on Insiders to See What Price is Right?

Inogen open market insider buy/sell since IPO

Sources and Helpful Resources
Slide 1:
• Background on oxygen therapy https://www.gao.gov/assets/320/315094.pdf

• Most oxygen patients (c. 80%) have COPD (Chronic obstructive pulmonary disease). C. 75% of the COPD patients are current or former smokers.

• https://www.sciencedaily.com/releases/2015/04/150423182544.htm and https://thorax.bmj.com/content/70/9/822

Slide 2:
• 82% of oxygen patients have COPD https://www.sciencedaily.com/releases/2015/04/150423182544.htm

• COPD causes 133k deaths per year https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3707177/

• 50% of the people who have COPD die primarily from COPD https://www.cdc.gov/nchs/products/databriefs/db256.htm

• The three links above would mean the following: 266k COPD patients die each year. If you gross up for the 18% of oxygen patients who don’t have COPD, you get to 324k deaths of oxygen patients
per year. That would be 12% of American dying people would have been on oxygen therapy as opposed to the > 50% implied by Inogen/Wintergreen estimates.

Slide 4:
• Market size is confirmed by the following academic research sources: National Lung Health Education Program http://www.nlhep.org/Documents/lt_oxygen.pdf, Respiratory Care Journal
http://rc.rcjournal.com/content/respcare/51/5/519.full.pdf and http://rc.rcjournal.com/content/respcare/58/1/48.full.pdf, American Thoracic Society
https://www.ncbi.nlm.nih.gov/pubmed/29048941
• “LTOT [long-term oxygen therapy] involves the lives of approximately 1.2 million Americans.”
• “Today approximately one million Americans receive LTOT, at a cost of over 2 billion dollars per year.”
• “It is estimated that over 800,000 patients annually receive long-term oxygen therapy in the United States.”
• “With an estimated 1–1.5 million U.S. oxygen users the potential impact [of oxygen problems] is enormous.”

• Lincare estimated an oxygen market size of 2.0m in 2011 (latest estimate before being taken private). Medicare shows that the oxygen market has declined c. 30% since then. That would give a
1.4m oxygen therapy population: http://files.shareholder.com/downloads/LNCR/0x0x179539/8b2473ea-c50d-4dfc-8b2d-86a8c8de3a86/LincareHoldings_4Q07.pdf

• The trade publication’s database aggregates and publishes the Medicare statistics about the main oxygen codes (E1390, E0431, E1392, K0738) in a user-friendly format. www.hmedatabank.com
Slide 7:

• Two of the largest homecare providers have mentioned in conversations that they expect to use POCs for seven years.